An initial bailout agreement reached between the Cyprus government and the Troika lifts the uncertainty and reinstates fully the public’s confidence in the country’s economy and the banking system, a Cyprus Central Bank source has told the Cyprus News Agency.
Describing the agreement as “an important event”, the same source noted that the signing of the memorandum will ensure the flow of funds to support the economy and the recapitalization of the banking system.
The same source has said that a first estimate on the recapitalization needs of Cyprus’ financial institutions, following a due-diligence audit by US firm PIMCO, is expected in the first week of December, and the total amount will be disclosed during the first ten days of January.
Concerning some of the details of the deal, the same source noted that the sale of property pledged as collateral for non performing loans can only take place after the economy’s recovery and not sooner than January 2016.
In case the property concerns ownership occupancy, the agreement foresees that the sale will take place after 24 months of non-performance, while all other cases will be sold after 18 months.
With regard to liquid assets, the same source said that financial institutions will have the possibility to lend 40% of deposits belonging to foreigners, whether in euros or in other currency.
The difference with the practice in the past is that it concerned deposits in foreign currency only, giving the bank the ability to lend 30% and retain the rest as liquid assets.
For Cyprus residents, the deposits to loans ration remains at 8 to 2.
Supervisory provisions will also be implemented to retain banks from so called concentration risk on a certain investment product, financial sector or a particular country, the Central Bank source added.
Finally, the source noted that, following recapitalization, the Central Bank will need to calculate whether Cypriot banks will require more capital following the ring fencing of their activities in Greece. The source noted however that the Troika has not positioned itself on the matter.
The Government of the Republic of Cyprus informed on the 25th of June 2012 the appropriate European Authorities of its decision to submit to euro area Member States a request of financial assistance from the EFSF/ESM.
The purpose of the required assistance is to contain the risks to the Cypriot economy, notably those arising from the negative spill over effects through its financial sector, due to its large exposure in the Greek economy.